Making waves in the financial world on January 14th, Laurence Fink, the CEO of BlackRock, Inc., the world’s largest asset manager, announced that BlackRock will be increasingly disposed to vote against board directors if their companies are not producing effective sustainability disclosures.1 In an open letter to other CEOs titled “A Fundamental Reshaping of Finance”, Fink cited the “growing investment risks surrounding sustainability” as an impetus for his position, calling climate change a “structural, long-term crisis.” Given BlackRock’s over $7 trillion assets under management, this letter is a signal from Wall Street to corporate America that sustainability will be a key factor driving investment strategy in 2020 and beyond.
In contrast to Fink’s 2019 letter to CEOs, which avoided mention of climate change, his 2020 letter states that climate change is a defining factor in companies’ long-term prospects and that it will effect a “a fundamental reshaping of finance”. Fink stated that “capital markets pull future risk forward” so “changes in capital allocation” will occur quicker than “changes to the climate itself.” BlackRock will be exiting investments that present a high sustainability-related risk, including thermal coal producers and will “launch new investment products that screen fossil fuels.” This radical shift goes beyond Blackrock, as Fink urged “[e]very government, company, and shareholder must confront climate change.”
Fink stated: “Over the 40 years of my career in finance, I have witnessed a number of financial crises and challenges – the inflation spikes of the 1970s and early 1980s, the Asian currency crisis in 1997, the dot-com bubble, and the global financial crisis. Even when these episodes lasted for many years, they were all, in the broad scheme of things, short-term in nature. Climate change is different. Even if only a fraction of the projected impacts is realized, this is a much more structural, long-term crisis. Companies, investors, and governments must prepare for a significant reallocation of capital.”
This letter is notable not just given Fink’s position, but because of what it encourages, if not requires, public companies to do. Fink advocates for use of the Sustainability Accounting Standards Board (“SASB”) reporting standard, noting that it provides a set of standards for reporting sustainability information across a wide range of issues, from labor practices to data privacy to business ethics. In addition to SASB, BlackRock also wants companies to adopt the Task Force on Climate-related Financial Disclosures (“TCFD”) framework for climate-related risks.
BlackRock’s selection of the SASB and TCFD standards make those formats even more attractive for future ESG reporting. The SASB standard is an attractive reporting metric in the U.S. as it was designed to be used in U.S. Securities and Exchange Commission filings, such as in the MD&A sections of a company’s SEC reports. SASB recognizes investors’ need to focus on ESG information that is actually material to operating performance and to an investment decision.
However, ESG information can create risks for reporting companies. Accordingly, it is imperative that companies understand these risks when making ESG disclosures under any standard. Risks can arise from the anti-fraud provisions of the Securities Exchange Act. These sections provide for causes of action against material statements made that are false or misleading.
To minimize risk, companies should have procedures in place to confirm, and possibly audit, the accuracy of ESG-related statements, including specific metrics, goals, programs, policies, and/or procedures.
The following are suggestions for approaching ESG reporting, whether an issuer is just getting started or has previously reported on ESG. First, verify the accuracy of ESG statements, regardless of what form the statements appear, and perform and oversee audits of ESG disclosures to confirm their accuracy. Second, build the right frameworks, policies, procedures, and controls that may be needed to identify compliance. Third, be aware of increased enforcement or liability risks that may arise from adopting voluntary principles on matters such as human rights and the environment. Fourth, communicate with regulators as needed to minimize risks of non-compliance. Finally, prioritize the time and resources needed to support ESG goals and proactively engage with the C-Suite/Board and your legal team on ESG goals.
For more information about ESG and reporting standards, please contact your Foley attorney or one of the authors.